Monday, October 6, 2008

Closing Costs? Take the Deduction!

So you recently closed on a mortgage finance transaction and you are wondering how you can benefit from paying all those closing costs. You can take a tax deduction on the "points" you paid to obtain your mortgage loan. There are several factors which come into play in regards to how you need to deduct them and if they can be deducted in full or over time. Make sure you understand these guidelines so you take advantage of this unique deduction. You can deduct the entire amount of the points in the year you paid them if the following conditions are met.
  • If your home loan is on your primary residence.
  • You use the loan to buy or build the home you will be living in.
  • If paying points to a mortgage company or bank is a standard practice in your area.
  • The points you paid are not excessive for your area.
  • Points were not paid as a lump sum for other services typically listed separate on the Settlement Statement (i.e. Appraisal Fees, Titlework, Attorney Fees, Credit Report Fees, Inspection Fees or Property taxes)
  • The points were computed as a percentage of the total amount of the loan.
  • The amount is clearly shown on the settlement statement.
  • The points were paid before or at the closing by the borrower or seller but none of the amount owed was borrowed.

Points that do not meet these standards are not wasted money. Most are very necessary to the process of obtaining a mortgage loan from any financial institution. However, if the y do not fit the above requirements - all is not lost. You can deduct them over the life of the loan. Simply total the points and divide them by the number of payments required within the term of the loan and then deduct the points on your annual tax returns (on a Schedule A with your 1040 return) by how many payments were made in that year.

So don't worry you were charged too just gives you a larger deduction. This should make everyone feel better. Well maybe not but anytime we can write off expenses on a tax return is helpful.

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